I don’t know if many people heard it go whizzing by, but international markets dodged a bullet last week. We’re safe for now, but that madman with a gun is still standing there…
That was the sound of a bullet with Europe’s name on it. It came within a hair’s breath last week of felling the economic giant, but this story’s not over yet.
For those who missed it (and judging by the media’s reaction, that’s most people), the German constitutional court decided that the European Central Bank’s ‘whatever it takes’ policy (similar to the money printing bonanza in the US) could continue.
Well, not exactly. Basically they said, “we don’t like it, it’s probably illegal, but there’s nothing we can do about it. Only the European Court of Justice can strike it down.”
If they had struck it down themselves, markets would have freaked. Troubled Euro countries – how long’s the list now? Greece, Italy, Spain, …France? – could have been in serious trouble. As it was, it was happy sailing on international waters…
… for now.
To give a bit of background, basically Germany is unhappy with the ECB being the buyer of last resort for Eurozone government bonds – basically propping up any incompetent government. Germany, who has a competent government, isn’t happy their hard earned money being fritted away like this.
The ECB announced its bond-buying program in mid-2012, as Europe teetered on the brink of outright crisis. And it is probably fair to say that that move saved Europe, and prevented borrowing costs in Italy and Spain from soaring to back-breaking levels.
But the problem with policies like this (as America is finding out) is that once you put them in place, they’re hard to reverse. Germany would like to see the policy unwound. Others would like to see it go further – to follow the US, Japan and the UK into Quantitative Easing and tackle deflation head on.
Until this decision, it had seemed like such a move would have been illegal. Now, that’s not so certain.
So the Germans who wanted to muzzle the ECB have ben thwarted, and it’s happy days for the market. Sure, we dodged a bullet. But the madman with the gun is still standing there.
This issue is far from dead, and in the long-run could come back to haunt Europe – with a vengeance.
The worst case scenario is that this will go down as one of the first steps towards the self-destruction of the euro.
Because we now have two of Germany’s most respected institutions – the constitutional court and the Bundesbank – on the record as being seriously opposed to the policies that are now a foundation of the euro itself.
As long as the German economy is strong, this shouldn’t be such a problem. Most citizens don’t normally spend much time worrying about what their central banks are saying.
But if things get tough – and all economies go through rough trots – then we have the makings of an anti-Germany conspiracy theory. And it plays upon the idea that hard-working Germany is propping up the free-loading Mediterranean.
And the surpa-nationalist EU and euro make for easy political targets, as the struggling European economies already show. The EU’s own polls show the popularity of the union plummeting in core countries such as France, Italy and Spain.
In that sense, May’s European elections will probably be a demonstration of strength for anti-EU parties across the continent. Anti-European or borderline racist parties, such as the French National Front, could make serious inroads in France, the Netherlands, Greece, the UK and Austria. If that happens, it will be a real shock to markets and could make it hard for centralist politicians to get anything done.
The real danger though is that the euro and the Euro-experiment have taken a fatal hit. The crisis, and the following response have stripped the project of support and legitimacy and exposed the design flaws in the single currency. The biggest flaw remains the lack of a large central budget and a transfer union of the sort that makes other federal currencies, like the US dollar, work.
They always knew it was a problem, but they hoped they could “get away with it”. If it’s one thing my car’s taught me is that “get away with it” strategies rarely work. You need a new head gasket, but you could probably get away with gaffa tape.
Europe is learning that lesson the hard way.
And the only thing that could save it from here is a more powerful, central European state – like a United States of Europe. But support for that kind of concept is in free-fall across the continent – even in Germany, one of big Europe’s long time champions.
The outlook is bleak.
And so where does that leave us?
Well, in the short term, Europe may soon be adding its tap to the gusher of global money. Interest rates have already hit rock bottom, and the only move from here is a US-style quantitative easing.
There are few bright points in Europe’s economic data pack, and the sagging economies in Italy, France and Spain will be particularly keen to see something drastic.
So we may see hot money from Europe taking the place of US money as the Fed pushes on with its taper strategy. This will see the continued spectacle of hungry money looking for a home anywhere stable and paying decent returns…
Like Aussie property.
The other thing to consider is just how likely another Euro-shock is in the near term. We got away with it in 2012, but the underlying problems haven’t gone away.
If the tensions break to the surface again, and you have to think it’s only a matter of time, it will hammer global share markets. It will spark a flight to safety.
… like Aussie property.
And so, it looks like it’s a double win for property… provided of course Europe doesn’t throw the whole world into chaos.
But if that happens, nothing will save us.